Potential Solutions for ERCOT’s Challenges

09/01/2013 | Mark Axford

Former state and federal regulatory chair Pat Wood talks about his revised views of energy market structures.

Pat Wood III —former head of the Federal Energy Regulatory Commission and the Texas Public Utility Commission, and current consultant and non-executive chairman of Dynegy—addressed a packed house at the Gulf Coast Power Association’s Spring Conference. Wood was one of the primary architects of the energy-only market for the Electric Reliability Council of Texas (ERCOT) in 2000, but he has since reexamined the potential benefits of adopting some kind of capacity market. It is unclear that simply raising the price caps from $3,000/MWh in 2011 to $9,000/MWh in 2016 will produce the desired reserve margin of 13% to 14%.

The reason for Wood’s philosophical change is not just to stimulate new construction of capacity but to better engage the market in demand response behavior. Simply put, demand response means that when the grid is experiencing a high level of demand, and therefore higher marginal prices, consumers would choose to reduce or eliminate a portion of their demand in exchange for compensation. According to the Brattle Group, current demand response in ERCOT is below 5% of the peak load and provided mostly by large industrials.

One thing seems clear: As ERCOT load continues to grow due to strong population migration into Texas and a booming oil and gas sector, modifications of some sort will be implemented to bring demand response and new construction of generation capacity to the forefront.

POWER Contributing Editor Mark Axford talked with Wood about these issues at the April event in Houston as temperatures were just beginning to rise.

As one of the original architects of the energy-only structure for ERCOT, what caused you to change your thinking about the desirability of a capacity payment for ERCOT, perhaps similar to the market design of PJM?

Wood: There was not a particular ah-ha moment—just an evolution of thinking and in part a recognition of what a good job PJM has done at bringing demand response into their market.

Is there any hope for a recipe that would allow new power plants a capacity payment without “giving” a capacity payment to all existing generators and thus driving up the price of electricity?

Wood: Perhaps only new plants that were located in areas where it was certain to provide congestion relief and therefore the capacity payment could be offset by reductions in congestion. If there’s a fair way to pay for demand response without discriminating against generators, I’m all for it. But so far, but I’ve not been able to come up with that magic recipe. There may not be a magic bullet, and we need to find a fair way to crank up the demand response.

Brattle asks the question: “Should ERCOT redefine its interpretation of the “1-in-10 standard” to not mean “1 load-shed event in 10 years” but instead to mean “1 outage day in 10 years,” as used in the Southwest Power Pool (SPP)? Or perhaps some other more precise quantitative target?

Wood: This is something that the Texas PUC should probably take a look at. But keep in mind SPP has more power import flexibility than ERCOT because SPP can has higher capacity links to MISO and other adjacent regions.

Should ERCOT take the calculated risk of running at a reserve margin of less than 13.75%, knowing that by definition, each 0.1% reduction in reserve margin will slightly increase the likelihood of an “1-in-10-year” event?

Wood: It’s not so important whether the reserve margin is calculated to be 13.75% or 15% or 11%. The important thing is to have a reliable grid. Once we establish a better way for demand response to bid in, we can unlock a variety of solutions. We spent a lot of money putting in all the smart meters at the residential level; now let’s find the best way to harvest the benefits during the hottest peak hours. This could be as simple as having the PUC authorize Oncor, CenterPoint, and AEP to cycle the AC for 20-minute intervals on the hottest hours. Alternatively, to do it in a more market-based way, have the [retail electric providers] bid the DR into the market linked to their own residential customer contracts allowing some AC cycling.

By my thinking, a large number of residential customers should be willing to participate, because in many cases, they’re away from the house at work when the DR is needed. Texans should be able to figure this out. Businesses in other states are moving to Texas to set up shop in a business-friendly setting that will reduce their operating costs. These new businesses expect a 21st-century electric grid that provides not only choice and competition but reliability as well. ■

— Mark Axford is a POWER contributing editor.

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